higher_educationWhile it is not generally a good idea to withdraw funds early from your IRA account, sometimes it may be necessary. To discourage the use of IRAs for purposes other than retirement, the
law imposes a 10% additional tax on early distributions from traditional and Roth IRAs unless an exception applies. Generally, early distributions are those you receive from an IRA before reaching age 59. The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount. Below are guidelines to some of these exceptions.

Job loss – If you retire, quit, or get fired at age 55 or later, you can take money out of your 401(k) without paying the usual 10% penalty. President Obama’s proposed budget includes a hardship exception to the typical 10% penalty for early withdrawals for those who have received unemployment for more than 26 weeks, allowing them to take out up to 50,000 per year from IRAs.

Medical needs – If your financial need is medical, you may also be able to withdraw retirement funds without penalty. For instance, if you are unemployed, you may take enalty-free distributions from an IRA to pay for your medical insurance if you meet eligibility requirements. Some medical expenses that are not reimbursed are also penalty-free. If you become permanently and totally disabled, you can also withdraw from your retirement accounts without penalty.

First time home purchase – The IRS allows you to withdraw up to $10,000 from an IRA without penalty for the purchase of a first-time home or if you have not owned a home in the past two years. This withdrawal has the advantage that you are not using that money to buy a depreciating asset like a car or taking a vacation; instead, you are using it for something that is an investment that usually will grow over time.

Educational expenses – Higher education expenses can be withdrawn from an IRA penalty-free. Those college expenses can be for yourself, your spouse or a child. Still, even if the withdrawals are without penalties, they may not be worth the long-term costs.

Other exceptions – There are several other exceptions that the IRS recognizes which are made:

  • To a beneficiary or estate on account of the IRA owner’s death
  • On account of disability
  • As part of a series of substantially equal periodic payments for your life (or life expectancy) or
    the joint lives (or joint life expectancies) of you and your designated beneficiary
  • Due to an IRS levy
  • For a qualified reservist distribution